Congressional lawmakers are putting together a reconciliation bill to enact much of President Biden’s Build Back Better agenda. Many lawmakers, however, want to make their own mark on the legislation.
Senate Finance Committee Chair Ron Wyden (D-OR) has released his own proposals on a variety of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. issues that differ in some important ways from the Biden administration policies. It will be worth watching to see how his ideas influence the reconciliation bill.
Together with Senators Mark Warner (D-VA) and Sherrod Brown (D-OH), Wyden has outlined an alternative proposal for raising taxes on U.S. multinationals that would retain the provisions put in place by the 2017 Tax Cuts and Jobs Act but change them in significant ways.
Overall, the proposal takes a different approach than the Biden administration, and has the potential to address certain defects with the Global Intangible Low-Taxed Income (GILTI)Global Intangible Low-Taxed Income (GILTI) is a special way to calculate a U.S. multinational company’s foreign earnings to ensure it pays a minimum level of tax. GILTI was adopted as part of the 2017 Tax Cuts and Jobs Act (TCJA) and can lead to high tax burdens on foreign profits, putting U.S. companies that operate abroad at a disadvantage. regime, but also has the potential to exacerbate certain uncompetitive features. The proposal would repeal the QBAI (qualified business asset investment) exemption, switch to a country-by-country calculation for GILTI but with a mandatory high-tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax. , raise the GILTI and Foreign Derived Intangible Income (FDII) rates to an unspecified level, address foreign tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. expense allocation issues for research & development (R&D) and stewardship expenses, and overhaul the Base Erosion and Anti-Abuse Tax (BEAT)The Base Erosion and Anti-Abuse Tax (BEAT) was adopted as part of the 2017 tax reform bill and is a tax meant to prevent foreign and domestic corporations operating in the United States from avoiding domestic tax liability by shifting profits out of the United States. among other unspecified changes.
Read the Tax Foundation analysis here.
While President Biden has not included changes to the pass-through deduction in his proposals, Wyden has proposed significant alterations to the deduction before it is scheduled to expire after the end of 2025. His plan would phase out the deduction for taxpayers with taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. above $400,000, with a full phaseout at $500,000; remove the limitations of the deduction for a “specified service trade and business,” which include services in health care, law, finance, accounting, athletics, consulting, and the performing arts; and forbid the deduction for married taxpayers filing separately, and for estates and trusts. He would also introduce new limits for agricultural cooperatives and qualified real estate investment trusts (REITs).
We estimate the plan would raise about $114 billion on a conventional basis over the next four years. The changes raise no revenue from 2026 to 2031, as the pass-through deduction is scheduled to expire at the end of 2025.
Read the Tax Foundation analysis here.
Financial Services Taxes
Wyden has also introduced two bills to raise taxes on certain forms of financial income using “mark-to-market” taxation, his preferred approach for increasing capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. es.
The first would reform the taxation of derivatives. Under current law, derivatives (financial assets designed to allow investors to hedge or provide access to underlying markets) are subject to a series of complex tax rules. Under Wyden’s reform, derivatives would be subject to mark-to-market taxation: taxpayers would be taxed (at ordinary income tax rates) as if they had sold and re-acquired the security on the last day of the calendar year.
The other bill would apply ordinary income tax rates and adopt mark-to-market taxation to carried interest income, which usually is income earned as performance compensation by fund managers in hedge funds and private equity. Currently, carried interest is taxed as capital gains, and it can be deferred; under Wyden’s proposal, it would be taxed as labor income, and individuals would owe tax independent of whether or not they realized the income.
Read the Tax Foundation analysis here.
Drug Pricing Reform
Lawmakers are considering drug pricing reform as a payfor in reconciliation. Specifically, they propose generating savings for Medicare Part D by forcing lower prices for certain prescription drugs.
Wyden’s principles are largely compatible with the House proposal, which would use the threat of steep excise tax penalties of up to 1,900 percent of drug sales to make pharmaceutical manufacturers “agree” to lower their prices. For example, Wyden’s principles outline allowing Medicare to negotiate with pharmaceutical companies by giving the Health and Human Services Secretary “tools and guidelines to negotiate a fair price” and creating “the right incentives to ensure that pharmaceutical companies participate in the negotiation process” alluding to an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. or other enforcement mechanism.
Read the Tax Foundation analysis of H.R. 3 here.
Energy Tax Provisions
Another Wyden proposal that is gaining traction is the Clean Energy for America Act. This bill would eliminate more than forty different energy-related tax provisions, and replace them with three technology-neutral credits: a production or investment tax credit for electricity generation plants that are 35 percent cleaner than average; a tax credit for fuels that are 25 percent cleaner than average; and a credit for the construction of energy-efficient new buildings as well as for the retrofitting of existing buildings.
On net, the bill would raise taxes on fossil fuel production by eliminating some legitimate deductions as well as subsidies and use that revenue to further subsidize clean energy, although in a more source-neutral way than current law does. The bill is similar to Biden’s proposed approach to energy tax policy, but the Biden plan more focuses on extending the existing mix of tax credits for renewable energy rather than condensing them.
Read the Tax Foundation analysis of Wyden’s proposal here.
Housing and the DASH Act
The Decent Affordable and Safe Housing for all Act (or DASH Act) is Wyden’s proposal to expand affordable housing and end homelessness. The bill includes several spending programs, such as support for the Housing Trust Fund, as well as several tax credits designed to incentivize low-income housing construction. The bill would expand the Low-Income Housing Tax Credit, as well as create a Middle-Income Housing Tax Credit, both targeted at developers, as well as a tax credit for first-time homebuyers. Additionally, the bill has a renter’s tax credit, in which landlords can receive a tax credit in exchange for a legally binding rent reduction for rent-burdened tenants. The bill also includes the Neighborhood Homes Investment Act, designed to address the problem of abandoned homes and urban blight. It would provide a credit to incentivize developers to renovate or rebuild homes that, in the private market, would not be worth the money and effort.
Biden’s housing tax proposals are similar, although his do not include the renter credit or the Middle-Income Housing Tax Credit.
Read the Tax Foundation analysis of Wyden’s plan here.
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